Question

A company is expecting a period of intense growth and has decided to retain more of their earnings to help finance that growth. As a result, the company is going to reduce the annual dividend by 16.25% a year for the next three years. After those three years, the company will maintain a constant dividend of $1.35 a share. Recently, the company paid $2.15 as the annual dividend per share. What is the market value of this stock if the required rate of return is 13.25%?

Answer 1

Year	expected dividend = dividend in year 0*(1+growth rate)^n growth rate = -16.25% n=1,2,3
0	2.15
1	2.15*(1-.1625)^1	1.800625
2	2.15*(1-.1625)^2	1.508023438
3	2.15*(1-.1625)^3	1.262969629
4		1.35
Horizon value =expected dividend in year 4/(required rate of return-growth rate)	1.35/(13.25%-0%)	10.19
Year	cash flow	present value of factor at 13.25% =1/(1+r)^n r =13.25% n=1,2,3	present value of cash flow = cash flow*present value factor
1	1.800625	0.88300	1.58995585
2	1.508023438	0.77969	1.175795165
3	1.262969629	0.68847	0.869517396
3	10.19	0.68847	7.0146
value of stock =sum of present value of cash flow			10.65